Small business on the rebound in U.S., TD report says

In Canada, it's a little mysterious to many of us why U.S. unemployment has remained so high for so long, creating a persistent drag on the economic recovery in our most important trading partner.

If there's a single phrase that provides the answer, it's "small businesses." Unlike small firms in Canada, which navigated through this recession rather well, those in the U.S. were hit early, hit savagely hard and have been late to rebound.

But rays of sunlight are finally poking through this dark cloud, finds Beata Caranci, a deputy chief economist at the TD Bank. In a report that explains why the U.S. small-business sector is so much more deeply distressed than its Canadian counterpart, Caranci also finds a number of reasons to believe that its hard times are letting up.

If she's right — and other analysts have begun to reach the same conclusion — the outlook for the whole North American economy will be a little brighter.

"The U.S. is our biggest export market and a lot of the sluggishness there has been because small business hasn't been expanding," Caranci said Wednesday. "This will be a positive influence for Canada."

The backdrop to this story is that the last recession, unlike earlier ones, struck smaller American firms with exceptional brutality.

Many were cut off from normal sources of credit as the U.S. banking system struggled with the aftermath of the financial crisis and, unlike big companies, they didn't have the option of tapping credit markets directly by selling bonds or commercial paper.

Worse, the American industries hardest-hit in the recession were ones with an especially high concentration of small outfits: construction, real estate and service companies of nearly all kinds.

As a result, smaller concerns, which account for just under 50 per cent of all U.S. employment, suffered 60 per cent of recession job losses.

And unlike the normal pattern of American recessions, in which small businesses take the first hit, but also enjoy the earliest recovery, this time they suffered first but kept right on suffering even after big business had begun to recover.

That's because big outfits were not only able to shelter themselves somewhat from the ravages of the squeeze on business credit from banks, but also because multinational manufacturing has been one of the big early winners in the U.S. recovery, helped by a cheaper U.S. dollar and strong demand from markets in China and other emerging markets. Such manufacturing, of course, is a sector where most of the players are big firms.

Meanwhile, smaller firms, far more dependent on the health of the domestic American market, were struggling to find customers among debt-burdened American consumers.

But this ugly picture is beginning to fade. New job statistics on small business show that by the middle of last year, their hiring had begun to recover.

In the second and third quarters of 2010 small business in the U.S. accounted for 60 per cent of all hiring. That's far shy of the 85 per cent of job creation they usually account for in a recovery, but a big improvement nevertheless.

While specific job statistics on small firms emerge only with a long delay, there are other indications that this improvement is continuing. Overall hiring in the service sector has kept growing this year, as has consumer spending on services, suggesting a continued growth of sales for American small business.

Still, it's clear that a complete recovery for this important sector of the U.S. economy won't be complete very soon, Caranci warns. That's because the construction industry remains badly damaged, with starts of new homes stuck at a fraction of the level needed for healthy growth.

With a huge inventory of foreclosed homes hanging over the market and declining home values making buyers wary of wading into home ownership, it will be at least a year before this industry starts to see much of an improvement, she predicts.

On the other hand, even this poster child for U.S. economic distress will clearly have better days ahead. Population growth and pent-up demand among young households show demand for homes trending toward a level several times higher than today's, which means that housing construction will recover over the next several years.

Montreal Gazette

jbryanmontrealgazette.com

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